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Bad Bank, Bad Idea

January 30, 2009 Economy, Equity Trading No Comments

Meredith Whitney, the Oracle of Wall Street, has spoken.

whitneyIf a bank were to sell its “bad” assets into a “bad bank,” it would still be left with lower earnings power from higher losses on “good loans” and the requirement to build reserves, lower earnings power from lower assets and a higher legacy expense structure, or both…The greatest unknown regarding the “bad bank” is at what price the gov’t would pay for “toxic assets.” If the government elects to pay fair market value, the banks will likely not elect to participate as capital hits would be too dear; however, if the gov’t pays above market, the burden on an increasingly “taxed” taxpayer grows…We would be most encouraged by banks selling “crown jewel” assets to cover their own losses. We believe private capital will readily invest in businesses that make money and grow. However, the banks do not fit this description. We remain cautious on the group.

Source:
Meredith Whitney: A Bad Bank Won’t Save Banks, by John Carney, Clusterstock, 1/29/09

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